Vivendi's telecom hang-ups

ReneeSchultes

Vivendi's efforts to put down the phone on telecoms aren't going so well. The French conglomerate's shares have risen 18% since last March, outperforming the French market, on the hope a far-reaching strategic review would lead to asset disposals and big capital returns. But Vivendi says it won't rush the sale of assets like its 53% stake in Maroc Telecom and Brazilian telecom GVT because it is focused on getting the best value for shareholders. Following a 14% fall in 2012 underlying earnings to €2.6 billion, investors could soon turn their attention to Vivendi's earnings prospects.

Vivendi wants to turn itself from a telecoms-heavy conglomerate into a media company focused on music, television and games. That seems a smart move. Vivendi's biggest earnings contributor, French telecom SFR, is locked in a price war launched a year ago by low-cost operator Iliad. SFR's earnings before interest, taxes, depreciation and amortization dropped 13% to €3.3 billion in 2012; Vivendi expects it to fall another 12% this year. Meanwhile, around the world, telecoms, cable and internet companies are hungry for content to differentiate their commoditized services.

Vivendi isn't short of media investment opportunities. One option is to buy the 39% of U.S.-listed games publisher Activision Blizzard it doesn't already own, swapping annual dividends worth $200 million for $1.6 billion in operating cash flow. That could allow Vivendi to raise dividends by €1 billion to €2.4 billion, says Credit Suisse. Another option is to buy other games publishers to merge with Activision.

But Vivendi needs to sell its telecom assets before it can start spending. The snag is that natural bidders for GVT such as Telecom Italia and Telefonica are also under pressure to deleverage, leaving Vivendi reliant on financial sponsors and satellite operator DirecTV. And a sale of the Maroc Telecom stake is potentially complicated by government influence in Morocco.

The shares already trade on 4.5 times 2013 Ebitda excluding listed stakes in Maroc Telecom and Activision Blizzard, a small premium to France Telecom on four times, based on UBS estimates. A 6% dividend yield provides further support. But until Vivendi makes progress on its transformation, it's hard to see why they should move any higher.

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